BankersHub.com April/May, 2016 Newsletter Page - 1

THE DEATH OF BANK PRODUCTS HAS BEEN GREATLY UNDER-EXAGGERATED

By Brett King (Excerpt from Augmented published with permission. All Rights Reserved)

ABOUT THE AUTHOR

Brett King is CEO and Founder of the fintech startup

“Moven”, a four times bestselling author, international

keynote speaker on financial services, and host of

BREAKING BANK$, his radio program with over 9

million monthly listeners. Brett’s books include Bank

2.0, Bank 3.0 and the recently released Augmented.

ABOUT BankersHub

BankersHub was founded in 2012 by Michael Beird

and Erin Handel, 2 Financial Services professionals

dedicated to educating and informing banks, credit

unions, solution providers and consultants in the U.S.

and worldwide. BankersHub delivers best practices,

research insights, opinions, economic trends and

consumer views through online web education, virtual

events and conferences, live streaming activities,

custom training and content development.

Newsletter Article

December, 2016

This article is an excerpt from Brett King’s newest

book, Augmented: Life in the Smart Lane,

published May, 2016.

Since 2005 I’ve been predicting the decline of

branch banking. For almost 10 years I fought

bankers who decried my assessment that

branches would cease to be the most

important channel in banking, to be replaced

by far more efficient mechanisms for revenue

generation and relationship. Today the

discussion is increasingly resorting to a sort

of desperate plea — “but branches aren’t

going to die completely, are they?” No one is

saying branches will grow.

Consider the following chart that plots

advisors across two dimensions: productivity

and compensation.

The United Kingdom, the United States, Spain, and a host of other countries

are seeing the lowest number of bank branches in decades. For the

UK you’d have to go back 60 years to find lower numbers of bank branches

than we have today, and 2014 saw the use of bank branches fall 6% in a

single year — the biggest reduction ever. In the US banks like BofA, Chase

and Wells have cut more than 15% of their branches in just the last 4 years,

bring their branch levels back to that of the early 1980s. While the US has

only seen declines of 1–2% per year in branch numbers, branch footprint

may be a much better indicator of the waning support for branches. Wells

Fargo has reduced their branch square-footage by 22% in just 6 years, and

for BofA it’s one-fifth of their branches that have already disappeared in just

the last 5 years.

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The reason we’re reducing branch numbers and square footage is obvious — customers just aren’t using

branches as much as they used to. They don’t need to. It’s not a branch design problem; it’s a customer

behavior problem.

When it comes to customer behavior, however, the greatest challenges for banking are yet to come and

they aren’t channel-based, they’re product-based.

Products That Make Sense in a Digital World

By 2020 we’re going to see 50 billion new devices connected to the Internet — everything will be smart.

Smart Fridges that order your groceries or can tell you what you can cook with the remaining items inside,

sensors you wear on your wrist or in your clothes that monitor your health and activity, cars that will talk to

each other and drive themselves, smart mirrors that will show you how you look in that new shirt, robot

drones and pods that will deliver you groceries or Amazon order — the world will be filled with smart stuff.

We live in a world where new technology emerges and is adopted in months today, versus the years it took

previously. It’s all moving so quickly. As more and more technology is injected into our lives, we become

acclimatized and just accept the increased role technology has to play. This is known as technology,

adoption diffusion.

Technology (product) adoption is constantly accelerating (source: Augmented)

As we move to this technology-optimized world, we’ll start to redesign where and how humans fit in society.

Banking will be embedded in our life. We’ll walk into a store, pick something off the shelf and walk out with

the payment auto-magically affected. Our fridge will order groceries on our behalf. Our smartphone will soon

be able to book us flights or a ticket for a train journey just by us asking it to do so. AI-based advisors will

consistently outperform human advisors. Underpinning all of this is an expectation that banking, payments

and credit will just work, in real-time, solving my problems and helping me manage my money everyday.

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As this happens, products will make way for experiences. Here are 3 quick examples:

The Uber of Banking is Uber

A recent Quartz (qz.com) article identified that up to 30% of Uber drivers in the US have never had a bank

account — many operated previously as taxi drivers in the cash economy. To be a driver on Uber, however,

they need a minimum of a debit card to get paid. So Uber has had to solve this problem by allowing drivers

to sign up for a bank account as part of the Uber driver application process, in real-time. Unsurprisingly, this

makes Uber the largest acquirer of small business bank accounts in the United States today, bigger than

Wells, BofA and Chase combined.

You probably never thought of Uber as an acquirer of small business bank accounts, but if you’re an Uber

driver and Uber can give you a debit card that enables you to get paid — then why would you go to a bank

branch to open an account instead? It also means that as a entrepreneur bank account the next obvious

move is to design day-to-day banking into Uber’s app instead of standing alone as a typical bank account or

mobile banking app.

For the millions of permalancers or gigging economy workers, it’s highly likely that the first time a freelancer

opens a bank account will be directly in response to a new ‘gig’ or job offer — if that employer (like Uber or

AirBnB) offers you a bank account as part of the sign-up process, why would you stop signing up for Uber,

drive to a branch and sign a piece of paper?

Uber is offering car leases to its drivers also — allowing drivers with no vehicle to sign up and get car

financing backed by demand from Uber. This is what the new banking experience looks like for small

business entrepreneurs. Uber is effectively doing all the sourcing for bank relationships, and has become an

acquirer for bank accounts, leasing and insurance. An Uber driver has no reason to come to a bank branch

for his needs today thanks to Uber’s commitment to experience design simply enabling the needs of a new

driver.

Bye Bye Credit Cards

As the world starts using NFC, closed loop App payment systems, Apple Pay, Samsung Pay and Android

Pay increasingly, were pretty quickly going to eliminate the need for plastic all together — we’ll just download

a token or a payment app to our phone, linked to our bank. We won’t use a card number, because it just

isn’t secure anymore. We’ll tap our phone, authenticate via our fingerprint, and receive a notification that the

payment has been successful.

If we download our cards (or tokens) to our phone, then it won’t be a credit or debit card — does it need to

have the same properties as those legacy ‘physical’ products? Not likely. Let’s think about how we use a

credit card today and how we might redesign that utility in a real-time world.

The two primary use cases for a credit card today could be illustrated thus:

1. I’m at the grocery store, swiped by debit card and the transaction was declined because my salary hasn’t

yet hit my bank account. I need to buy these groceries for the family today, so I’ll use my credit card and

worry about why my salary hasn’t hit the account later, or

2. I really want this new iPad Pro, but I can’t afford it based on my current savings. If I use a credit card, I

can pay it off over the next few months

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If we’re redesigning this in a mobile, real-time world we wouldn’t need to sell a customer a credit card at all

because we’ll just fulfill in real-time.

The grocery store scenario becomes an Emergency Cash credit facility — a real-time overdraft or line of

credit that we deliver in one of two ways. We either preempt the cash shortage because we know the

customer regularly shops at Tesco or Whole Foods and spends $600 or £300, but only has say £100 quid in

his account. Either that, or we offer it in real-time when the tap of the phone to pay at the POS fails due to

insufficient funds. We can eliminate rejection of a typical credit card application, because we only will offer

the Emergency Cash to someone who qualifies. That’s a huge deal because between 15–30% of applicants

get rejected for a credit card typically.

For the In-Store

Financing scenario

there are a ton of new

approaches that fit the

real-time approach

better than a credit

card.

We can allow people

to put a wishlist on

their phone for all the

stuff they want to

save for, and when

they walk into a store

where a wishlist item

is available we can

then offer a discount

combined with

contextualized credit offering. We can learn from previous purchase or search history and anticipate

a purchase where an instantaneous line of credit option might be attractive. We can use a preferential low

or zero-interest 12-month financing deal getting them to switch payment vehicles at the point-of-sale, or we

can trigger an offer based on geo-location. We can use iBeacons and match an offer with a customer to

give a preferential deal where credit is built in. We can match savings with credit — let’s say you’ve saved

$300 towards that new smartphone; we can offer the remaining $300 you’ll need in real-time as you walk in

the store.

“We’ll probably be the last generation to use the term credit card and debit card…It will probably be debit access or credit access, and it will likely be loaded on to a mobile device.”

John Stumpf, CEO of Wells Fargo at Goldman Sachs Financial Conference, Dec 8, 2015

Basically we will need to totally redesign the way we message credit facilities to customers, the way we

determine risk (based on behavior), and the value proposition we offer to a customer — it’s all now about

how I enable you in this moment. Not requiring the customer to think ahead, applying for a product for when

you might need a line of credit.

From a mechanic’s perspective we can better match risk and behavior to the type of credit line, we can

eliminate the need for a physical product or any conventional application process at all, and we can use

behavior, location or moments of desire/doubt (not product features) to trigger an offer.

Figure 1: It turns out you don’t need a ‘card’ — you just need access to credit (credit: Moven.com)

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In this world, a real-time world of engaged customers, why would you ever sell a piece of plastic to a

customer ever again? You would still sell credit, just not ‘card’.

There’s another angle to this that retail banks and lenders will have to come to terms with. Airline miles

won’t sell a ‘digital’ credit card in the medium term, because they are not part of a real-time engagement

model. Rewards may, but only if they are contextual and immediately relevant — i.e. offer me a discount for

something you know I want to buy, but only when I walk into the store that is selling it. Millennials won’t be

sold on delayed gratification on airline miles when they realize they can probably get a better deal buying

the ticket directly instead of through very expensive airline miles.

When your self-driving car has a bank account

While owning a car will definitely be an option in the future, many millennials and their antecessors will opt

to participate in a sharing economy where ownership is distributed, or where self-driving car time is rented.

“[In 15–20 years] any cars that are being made that don’t have full autonomy will have negative value. It will be like owning a horse. You will only be owning it for sentimental reasons”

Elon Musk, Tesla earnings call Q3 2015

Let’s take a scenario in 2025 where a millennial subscribes to a personalized car service guaranteeing

access to a self-driving car for certain number of hours each day, or where he or she buys a ‘share’ in a self-

driving car with some friends or colleagues.

Figure 2: Will your children ever own a car? I don’t know, do you own a horse?

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The car picks up the millennial and takes her to work, and is alerted that the car will be required again in

approximately 6-hours time. After dropping the individual at her shared workspace for the day, the car goes

off and collects two more of the collective owners of the vehicle and delivers them each to their required

locations. At this point the car makes a decision to find a charging station and recharge for an hour. It drives

to a local car park where supercharging stations are location and hooks in. As the car made its last drop off,

it had already worked out that it would need to recharge, and had negotiated with the car park’s machine

interface, negotiating a price for both the parking facility and energy it would need.

A company owns the car park itself, but they have allowed individual investors to own or lease a

supercharging station connected to a solar grid on the roof of the car park, to offset the costs of retooling the

car park with charging stations. Each supercharger has its own wallet linked back to it’s owner(s) and the

energy used by the self-driving car as it recharges, is paid for in KwH directly between the car and the

supercharging station, as is the same for the car parking fee paid to the garage owner.

The self-driving car then, calculating it has approximately 3.5 hours before it will be required by one of its

owners again, logs in to Uber and makes itself available for a 3-hour block as a self-driving resource. It is

immediately called out to a pickup, and after 3 hours has earned $180 in fees, which it puts away in its

wallet.

The wallet in the self-driving car is not linked to a single individual owner. It is a collective account. Any

earnings it makes are used to offset ownership costs, energy costs, parking and registration fees, etc. The

owners just top up the self-driving car’s own wallet on a monthly or weekly basis as required, but the self-

driving car’s ability to pay for energy, or earn income for rental time is independent of a typical identity

structure or bank account. It is an IoT (Internet of Things) wallet or value store.

The wallet in the self-driving car is analogous to the debit card you carry around in your wallet today, but

there is one big difference. A human/person does not own this wallet, it is linked to the car and may or

may not have multiple human owners and the identity of those owners could change frequently, but it

doesn’t have to have a human owner linked at all theoretically. In today’s banking world this might be

marginally possible, but only through a torturous series of contracts, declarations and identity verification

processes that would essentially require all of the owners of the vehicle, and the self-driving car itself, to

personally front up at a bank branch. That’s clearly and absolutely ludicrous.

Whether a self-driving car, a smart fridge that orders your groceries, a smart house that both consumes and

generates data and energy, a solar array, or any AI that negotiates specific transactions, these all will need

independent access to the banking system, along with their own bank account.

This obviously raises some very interesting questions.

You can’t ask a self-driving car or a fridge to identify itself at a bank branch with a signature, so will it have

its own identity?

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Will the self-driving car have to pay tax on the money it earns as part of a sharing economy, or will this be

passed on to the collective owners?

If you’re a bank, 2016 is the year you start redesigning every single product in your wheelhouse

The future is about putting the bank in the lives of our customers with zero friction (ok, well minimal friction)

every day. That means we have to come to terms with the fact that anytime we stick a piece of paper in front

of a customer it is pure friction, and it certainly won’t allow us to execute revenue or relationship on a

mobile phone, iPad or in a self-driving car in the moment. Let me state that again to be crystal clear…

Paper and signatures have no future in the banking world — at all.

Are you sure? Yes. Not least of all because with facial recognition, image recognition on drivers’

licenses/passports, and other identity verification technology (geo-location, social media, heuristics, etc) a

physical Identity Verification (IDV) is now 15–20 times riskier than a digitally led IDV process. Why do

you think every customs department in the world is going to biometric verification of passports at borders?

The answer is simple. Humans are the single weakest link in the security process — the most prone to

errors, the least likely to pick up a false ID document.

Think about that. The single riskiest thing banks do today is have a face-to-face account opening based on

a piece of paper.

Keep in mind that every

FinTech competitor you have

doesn’t use paper or signatures

already — they’re way ahead of

the curve on this. They’ve got

no legacy process to

circumvent.

If you have a physical

representation of a bank

product (card, checkbook,

bank statements, application

form, sales brochure, etc)

prepare for that to disappear by

early next decade almost

entirely.

The component utility of

banking namely a value store,

a payment, a line of credit, a

savings rate, etc. will be

integrated into experiences

defined by context. The future of

product design isn’t products at Figure 3: Figure 3: AliPay uses facial recognition for better payments security. (credit: Alibaba)

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all, it’s experiences — money experiences, payment experiences and credit solutions.

By 2020 you won’t call your bank accounts ‘checking’ accounts. By 2022 banks won’t have a head of cards

or a cards division. You won’t differentiate between small business bank accounts and retail banking —

 customer behavior is what will differentiate the use of a value store. A mortgage will be part of a home

buying experience, not a separate experience. If you choose to own a car, you’ll order a car with or without

financing, but you won’t ever sign a piece of paper — the only thing you’ll need to do is nominate how much

you want to pay each month and where the money for those payments will come from.

This is going to take a complete, from the ground up, rethink of every product in the business as we re-task

it for real-time engagement, and it has already started. 2016 is the year where bankers start to have to deal

with it in earnest.

This is what disruption in banking really looks like…

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